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BofAML Thinks RBI May Cut Rates In August, Here’s Why

Most brokerages expect the Reserve Bank of India told hold its status quo policy this year — except Bank of America Merrill Lynch Global Research. The international research firm foresees possibility of a rate cut in the next policy meet in August citing the central bank’s neutral stance.

The fundamentals point to a benign inflation outlook: weak growth, tight liquidity, normal rains, BofAML said in a note.

We grow more confident of our 25 basis points August 1 RBI rate cut call, if rains are normal.”

BofAML Global Research

The six-member monetary policy committee of the RBI left interest rates unchanged at its first meeting of the new financial year yesterday, indicating that the economy is finely balanced between a pick-up in growth and a rise in inflation. The MPC has also maintained a neutral stance on monetary policy.

Also, for 2018-19, the MPC has reduced its inflation forecast marginally. It now expects consumer price index-based inflation in the first half of the year at 4.7-5.1 percent, and inflation in the second half of the year is seen at 4.4 percent.

Here is what other brokerages had to say about the RBI Policy:

Nomura

Downward revision to inflation forecasts a positive surprise.

Lower inflation projection rules out any imminent tightening.

Expect repo rate to be left unchanged throughout 2018.

Coming policy meetings still prone to higher risk of a shift in the policy status quo.

Citi

Need for policy action in FY19 to be minimal if RBI’s new CPI forecasts do materialise.

CPI projections could potentially be revised upwards in the August policy.

RBI move in June policy ruled out.

Current 10-year benchmark bond yields can drift towards 7 percent.

Sharp rally in Indian fixed income beyond the initial exuberance may, thus, be hard to sustain given persisting medium term challenges.

Morgan Stanley

Don’t expect a significant overshoot of inflation relative to the RBI’s target.

MPC’s assessment of the inflation trajectory for H2FY19 to be key in determining its response.

Maintain view that MPC will hike rates in Q4CY18.

Macquarie

Slight dovish read of the statement.

Continue to expect rates to be on hold in 2018.

Bond yields likely to be range bound (around 7.0-7.3 percent).

Limited room for yields to decline further.

Edelweiss

Continue to expect a pause in the rates going forward as well.

Key monitorable lies on the external front where there is a risk of global rates moving higher.